Lenders in the auto finance market have been given extra time to address a looming increase in complaints, as the city regulator moves to expand the scope of claims to include leasing agreements.
The Financial Conduct Authority (FCA) has set a new deadline of 4 December 2025 for lenders to respond to customer complaints relating to discretionary and non-discretionary commission arrangements. Importantly, the complaints process now covers not only traditional auto finance credit agreements, but also car leasing deals.
The move by the Financial Conduct Authority (FCA) follows a pivotal Court of Appeal decision in October. The court ruled that car dealers taking a commission from lenders without the customer’s informed consent is illegal, widening the potential scope of claims for compensation. Previously, the focus was on discretionary commissions tied to interest rates on financing agreements – a practice that was banned in 2021. Now, the issue may affect all loan commissions that were not properly disclosed, increasing the industry’s exposure to compensation claims.
According to the FCA, the Court of Appeal ruling does not cover leasing directly, but the regulator has decided to include such agreements in the complaints process to ensure consumers using similar products receive consistent protection and compensation. “Consumers also use leasing to access cars, and it is important that consumers who use similar products for similar purposes are treated in the same way,” the FSA said in a statement.
The Financial Conduct Authority had already indicated last January that it was investigating the practice of discretionary commission arrangements in car finance. Such arrangements allowed traders to earn commissions based on the interest rate they charged clients, which could lead to higher borrowing costs. These deals are banned from 2021, but old loans made before that date remain under scrutiny.
The Financial Regulatory Authority notes that from 2007 until the end of 2020, approximately 14.6 million car financing agreements included these discretionary commissions. The latest legal ruling expands the scope beyond these arrangements, potentially adding up to 11.3 million additional loans to the pool of claims. Clients charged undisclosed commissions may now be entitled to compensation.
This expanded responsibility can be costly. Credit rating agency Moody’s previously estimated that if the Court of Appeal ruling is upheld, total compensation costs could reach £30 billion. Although a High Court appeal on the matter is still pending, the FCA expects complaints to rise regardless. Such a figure would put the car finance case closer in scale to the notorious Payment Protection Insurance scandal, which ultimately cost UK financial institutions around £50 billion in damages.
While larger banks such as Lloyds, Barclays and Santander UK may have the strong balance sheets needed to absorb these potential costs, smaller, more specialist lenders face a more challenging outlook. Moody’s warns that mid-sized financial services providers, including Close Brothers, Aldermore and Investec, and the captive financing arms of automakers such as Ford and Volkswagen, could face a “greater hit to earnings and capitalization”.
The FCA’s move to expand the complaints process and provide lenders with a response deadline of December 2025 aims to ensure consumers have a consistent and direct path to redress, while giving the industry time to adapt. As the sector braces for a wave of claims, all eyes will be on the Supreme Court decision and any further clarification from regulators on how best to manage this potentially costly new chapter in the car finance process.
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